India has become a prominent destination for multinational corporations seeking to establish Global Capability Centres (GCCs). The country’s GCC sector has witnessed substantial growth, emerging as a key strategy for global enterprises aiming to enhance capabilities in India. In a related article detailing GCC models, six primary structures are highlighted: the Managed Services Model, the Captive Centre, the Build-Operate-Transfer (BOT) Model, the Hybrid Model, the Centre of Excellence Model, and the Shared Services Model. Each of these models represents a unique relationship dynamic among the multinational group (foreign parent), the Indian entity (GCC), and, where applicable, third-party service providers. These structural differences have significant tax implications.
Income Tax Implications
For the Managed Services Model, the multinational group does not establish an Indian entity, leaving the service provider to handle its own tax obligations. The multinational group’s primary tax exposure in this model is the risk of constituting a Permanent Establishment (PE) in India.
Under the Captive Centre, Hybrid, Centre of Excellence, and Shared Services Models, the Indian entity receives service fees, taxable as business income at the prevailing corporate tax rate, which ranges between 22% and 30%, subject to certain conditions, including surcharge and cess. These models may opt for a concessional regime for domestic companies, and the taxable profit is typically modest if the fees are structured on a cost-plus basis, which is the standard transfer pricing approach.
The BOT Model operates in two phases. Initially, the service provider is taxed on its GCC-related income, with the multinational group bearing only the PE risk. Post-transfer, the Indian entity is taxed akin to a captive centre, with capital gains tax liabilities arising for the service provider upon transfer. These tax implications should be considered from the outset in pricing and service agreements.
For the Centre of Excellence Model, entities engaged in scientific research may benefit from deductions under section 45 of the Income Tax Act, 2025. However, companies opting for the concessional tax regime may not qualify for this deduction, necessitating careful planning.
Goods and Services Tax (GST)
In most GCC models, the Indian entity provides services to the multinational group outside India. When prescribed conditions are met, these services qualify as exports and are zero-rated under the IGST Act. Typically, entities choose to supply under a Letter of Undertaking and claim a refund of unutilized input tax credit to avoid cash flow costs associated with paying IGST and seeking refunds.
A critical condition to observe is ensuring the supplier and recipient are not ‘distinct persons’ as defined under Explanation 1 to Section 8 of the IGST Act. This issue generally does not arise when the Indian entity is a separate subsidiary of the multinational group but should be verified in each scenario.
In the Hybrid Model, service fees paid to the Indian entity by the service provider are domestic transactions subject to GST, although the Indian entity can claim input tax credit.
If the transfer in the BOT Model qualifies as a going concern, it may be exempt from GST.
Transfer Pricing
Transfer pricing is a consistent tax concern across models where the Indian entity is an associated enterprise. The IT Act mandates that all cross-border transactions with related parties adhere to arm’s length pricing. The Transactional Net Margin Method (TNMM) is commonly employed for GCC service arrangements, comparing the Indian entity’s operating margin with comparable independent service companies.
Documentation is necessary when the aggregate value of international transactions exceeds INR 1 crore annually. For larger GCCs, an Advance Pricing Agreement (APA) with the Central Board of Direct Taxes (CBDT) offers certainty on transfer pricing methodology and pricing for up to five years, with possible rollback for four years under both unilateral and bilateral APA arrangements.
In the Managed Services Model, transfer pricing obligations do not arise since the service provider is an independent entity. The BOT Model transfer from the service provider to the Indian entity is not a transfer pricing transaction under Chapter X, as the parties are typically not associated enterprises. However, if the multinational group exercises significant control over the service provider, resulting in a lack of independence, Indian tax authorities may recharacterize the arrangement, leading to potential transfer pricing and PE exposure.
Permanent Establishment Risk
PE risk is a substantial tax concern for multinational groups. If a PE is deemed to exist in India, the attributable profits are taxed at the rate applicable to foreign companies. Three types of PE are relevant for GCC structures:
- Fixed Place PE: This arises when a multinational group maintains a fixed place of business in India for its operations. The risk is elevated if the multinational group’s employees are frequently present in India conducting substantive business activities.
- Service PE: This form of PE occurs under several of India’s tax treaties if services are rendered in India through employees for a specified duration.
- Agency PE: This risk emerges when an Indian entity habitually concludes contracts or plays a principal role in contract negotiations on behalf of the multinational group. This is particularly pertinent in the Managed Services and pre-transfer BOT models.
Maintaining arm’s length pricing significantly mitigates PE exposure. However, a comprehensive analysis by professionals is essential to consider all nuances.
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Additional Considerations
Multinational groups should be aware of withholding tax on outbound payments, such as IP or software licensing fees, which may be subject to tax in India. Additionally, indirect transfer concerns may arise if the Indian GCC constitutes a substantial portion of a holding company’s value, potentially triggering Indian capital gains tax on foreign share transfers.
Conclusion
The tax consequences of GCCs are intrinsically linked to the chosen structural model. Key considerations include ensuring arm’s length pricing for transfer pricing compliance and reducing PE risk, pre-agreeing transfer valuations in the BOT model, and managing operational independence in the Managed Services model to mitigate PE risk.
Siddhi Ghatlia, a Partner, and Palak Shah, an Associate at ALMT Legal, contributed to this analysis.
